The projected P&L for the next three years

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You have to decide about an investment proposal for a new appliance. The initial investment is
250,000 €, due Jan. 1, 2023. You want to sell the appliance after three years. The estimated salvage
value at the end of 2025 is assumed to be 25,000 €. Your firm applies straight line depreciation. In
addition to depreciations your annual fixed costs (payable in cash) are 22,000 €. Moreover, you
have the following projections:
Year 2023 2024 2025
Annual cash sales 150,000 165,000 190,000
Annual variable costs (payable in cash) 45,000 48,000 53,000
For simplicity assume that all payments (except for the initial investment) are made at the end of a year. To finance the initial investment, a loan over 80,000 € is required. The interest rate on the loan is 3%.
 Produce the projected P&L for the next three years.
 Calculate the relevant cash flows based on this P&L.
 Calculate the NPV at 10% and the equivalent annuity.
 Determine IRR of the project using the corresponding excel function.
 Provide a graph for the “NPV curve”.
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Free Cash Flows

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You are interested in buying a small day clinic in Frankfurt. You get the following financial forecasts (in mio €):
t = 0 1 2 3, 4, 5, …
Current Assets 300,00 315,00 330,75 330,75
Fixed Assets 750,00 787,50 826,88 826,88
Total Assets 1050,00 1102,50 1157,63 1157,63
Current Liabilities 30,00 31,50 33,08 33,08
Long term Liabilities 300,00 328,04 381,59 381,59
Equity 720,00 742,97 742,97 742,97
Total Capital 1050,00 1102,50 1157,63 1157,63
Sales 1500,00 1575,00 1653,75 1653,75
CoGS 1350,00 1421,25 1492,32 1488,38
Depreciation 75,00 75,00 78,75 82,70
Interest 12,00 13,13 15,27 15,27
Taxes 18,90 19,70 20,22 20,22
Net Income 44,10 45,93 47,19 47,19
Calculate the “Free Cash Flows”.
The cost of debt is 4.3% p.a. and the beta is 0.95. Calculate with an equity risk premium of 5% and assume that the firm’s debt ratio in future periods is 30% on average. How large is the WACC?
What is a fair price to pay for the company? Provide the “firm value” as well as the “equity value”.
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THE RISE AND FALL OF THE SEPARATION OF POWERS

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Develop a 3 page reflection paper that highlights and summarize the content of the chapter and explain in detail how the content benefits U.S. citizens. Sample Solution